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Japan’s Employee Pension Funds to Be Dissolved

Legislation to abolish employee pension funds (EPFs) deemed too risky to the country’s social security system passed the Japanese parliament in June 2013 and will be effective April 2014.

After a government committee report in July 2012, which examined EPFs in the wake of an investment-fraud scandal, the Ministry of Health, Labour and Welfare announced in September 2012 that it would examine measures to abolish the funds.

Funds whose assets fall short of liabilities for contracted-out benefits to be dissolved within five years. “When EPFs are dissolved, any funding shortfalls for the minimum reserve must be made up by participating employers, and the assets equal to the minimum reserve must be returned to the government,” explained Haruka Urata, Tokyo-based director of Towers Watson’s benefits business in Japan.

Funds with more assets than the minimum reserve can continue but will be subject to tests every year. The tests will be introduced five years after the new law’s implementation, according to Towers Watson. If a fund falls below the minimum reserve or its liabilities, the government will order its dissolution.

No new EPFs to be established in the future.

Government encouragement of financially sound EPFs to switch to other types of pension plans.

EPFs are supplementary occupational pension plans operated voluntarily in Japan and cover private-sector employees only. The funds were introduced by law in 1965 to offer an additional benefit to the government-run public pension system.

Among Japan’s 34.5 million private-sector employees, 4.37 million (12 percent) were covered by EPFs as of March 2012. The percentage has been declining over the years, Urata said. The number of pensioners in EPFs is 2.93 million; there were 560 EPFs as of March 2013.

Employers Need to Act Now

Multinationals with operations in Japan should determine whether their local offices are participating in EPFs, and if they are, the companies should consult a professional advisor to fully understand the implications of the new legislation, Urata said. He advised seeking counsel from third-party professionals, rather than from plan administrators.

“The deteriorating funded status of EPFs and the increasing financial burdens on participating employers over recent years have prompted some foreign multinationals to withdraw from their EPFs by paying a one-time withdrawal fee; however, it may now be preferable to wait for the dissolution of an EPF, rather than withdrawing and paying a fee,” Urata suggested.

Employers with defined contribution plans in Japan should also monitor the issue, as these plans could undergo changes in the future when EPFs are effectively abolished.

“Since detailed regulations are scheduled to be released this year, employers should closely monitor the development,” Urata said.